October 25, 2018
Nokia has warned of imminent job losses as it announced plans to cut another €700 million ($798 million) in annual costs over the next two years to boost profits.
The Finnish equipment vendor said about €500 million ($570 million) of that figure would come from reduced operating expenses as it makes cuts to central support functions and consolidates some activities. Layoffs will also result from investment in digital tools and further automation of the business, it said.
Nokia Corp. (NYSE: NOK) has yet to indicate how many jobs may be axed but says the latest restructuring effort will have a €900 million ($1 billion) impact on cash flow. The company had about 103,000 employees on its books at the end of December.
Salary data published by Nokia for 2017 suggests that around 8,000 jobs could be at risk from a €500 million ($570 million) program, although some of the savings are expected from reductions to real estate and other overhead costs.
The update came as Nokia flagged sales of €5.46 billion ($6.23 billion) for the recent third quarter, down 1% compared with the year-earlier period but up 1% in constant currency terms. That organic improvement compares with a year-on-year decline of 1% for the second quarter. On a non-IFRS basis, Nokia's operating margin improved to 8.9% from 6.3% in the second quarter. (See Profits Crash at Nokia's Networks Biz.)
Moreover, at the networks business, which accounts for about 90% of total sales, the operating margin rose from just 1.5% for the second quarter to 5% for the third.
Overall net profit fell 40%, to €309 million ($352 million), compared with the same period in 2017.
The news didn't cause much of a stir among investors, as Nokia's share price dipped only slightly, by 0.45%, to €4.66 on the Helsinki exchange Thursday morning.
In a statement CEO Rajeev Suri said the results "validate our earlier view that conditions would improve in the second half of the year." Nokia saw growth at all five of its networks business groups, he said, and had delivered better profitability than in the first half of the year.
The company reaffirmed its full-year guidance for an operating margin of between 9% and 11%. It expects net sales at its networks business to outperform its primary addressable market, which it thinks will decline 1-3% this year.
Despite the sequential improvement in profitability, Nokia's operating margin is down from 12.1% for the third quarter of 2017, and the latest savings initiative indicates an older program has not delivered sufficient long-term benefits.
Under that scheme, Nokia has been aiming for €1.2 billion ($1.4 billion) in cost savings by the end of this year compared with 2015, when combined expenses across Nokia and the Alcatel-Lucent business it subsequently bought were approximately €7.3 billion ($8.3 billion).
Nokia says it is on track to realize those savings, but its new €700 million ($798 million) program is intended to lift its operating margin to between 12% and 16% for the 2020 financial year.
"The plan we are announcing today is the logical step to take as the completion of our Alcatel-Lucent-related cost saving program draws near," said Suri. "Since the acquisition closed, we have been integrating and capturing synergies and now it is time to focus on optimizing and ensuring that we are lean in every part of our business."
Buvac to lead enterprise business
In what seems like a bid to reinvigorate a growth strategy targeting non-telecom markets, Nokia has also set up a new enterprise business group that will be led by Kathrin Buvac, its chief strategy officer.
The move comes two years after Nokia said it would target a range of markets outside the main telecom sector, including energy, transportation, the public-sector, so-called "technological extra-large enterprises and the webscale players. This overall addressable market is estimated to be worth about €18 billion ($20.1 billion) annually, but Nokia expects it to grow at a compound annual growth rate (CAGR) of around 13% during the next five years. While the main telecom market is worth as much as €113 billion ($129 billion), Nokia reckons it will grow at a five-year CAGR of just 1%. (See Nokia's New Software Unit to 'Redesign' Company.)
Despite making some progress in these areas, they have so far had little impact on overall sales. The establishment of a new enterprise group is likely to entail some additional restructuring as it absorbs units addressing customers outside the telecom sector, but Nokia will hope it provides a spur to these activities.
"On the enterprise side, our strategy has been to target high-growth, high-margin opportunities with a limited set of companies needing telco-grade networks," said Suri. "Our strong results to date have validated this approach and we are taking steps to build even further on our progress."
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Like Swedish rival Ericsson AB (Nasdaq: ERIC), Nokia has been guiding for an improvement in the networks market as telcos begin to make investments in next-generation 5G equipment starting in the second half of this year. (See Have We Reached Peak Ericsson? and Ericsson Corruption Scandal Sullies Strong Q3.)
The 5G activity has been driven largely by the main US operators, and Nokia landed a $3.5 billion 5G contract with T-Mobile US Inc. in the summer. However, expenses related to 5G customer trials are expected to add between €100 million ($114 million) and €200 million ($228 million) in costs for 2018. Nokia said this would partially reduce the positive impact from its cost saving efforts. (See Nokia Reels In $3.5B 5G Deal With T-Mobile US.)
Suri previously said that some customers had used existing budgets to fund their initial 5G activities and blamed this for some of the pressure on Nokia's operating margin.
Even so, it managed an organic sales improvement at both its fixed and mobile networks for the third quarter, with the overall revenue figure up 2% on a constant currency basis, to about €2.13 billion ($2.4 billion).
Sales at Nokia's global services business grew 2%, to €1.38 billion ($1.57 billion), compared with the year-earlier quarter, but were up 5% on an organic basis. There were also improvements across all units at the IP networks and applications division bar the IP routing business, where a decline was blamed on components shortages across the supply chain.
Nokia Software, which provides back-office and other digital services, continues to build momentum, flagging a 3% increase in sales, to €363 million ($414 million), and a 4% rise in constant currency terms. In its statement, Nokia said the business had benefited from "investments to build a dedicated software sales force with specialized go-to-market capabilities."
Nokia Technologies -- the company's small licensing unit -- reported a 27% drop in sales, to €351 million ($400 million), and a 26% decline in operating profit, to €290 million ($331 million).
— Iain Morris, International Editor, Light Reading
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